August 29, 2014

Confidence in Samsung is Collapsing as Apple's iPhone 6 Nears

In early July we reported that Samsung's profits had plummeted 24% on slow smartphone sales. In mid-July we followed-up with a report on Samsung taking back executive bonuses for poor performance resulting in a round of infighting taking hold at the company. Today it's being reported that with Samsung's calendar year winding down on August today, shares in South Korea's biggest stock are down about 8.1% for the month, for a total decline of 16% from their June 3 highs. This is in stark contrast to Apple's stock which hit a record high on August nineteenth and has continued to climb ever since.

Today's Wall Street Journal report notes that "The declines come as analysts and investors turn increasingly sour on the near term prospects for both the company and its stock. Earlier this week, analysts at Woori Investment & Securities, Nomura Securities and Hyundai Securities all slashed their target price on Samsung."

Woori Investment & Securities analyst Peter Lee noted that between Chinese players Xiaomi attacking Samsung and Apple's iPhone 6 launching shortly, it's likely to push Samsung's operating profit to as low as six trillion won for the current quarter.

Will-Cho, an analyst for KDB Daewoo Securities piled on by stating that Samsung's inventory problems …Samsung smartphones are piling up unsold at stores…means that Samsung will have to either ship fewer phones, or sell more by slashing its prices. Cho warned his clients that "Either way, higher costs will eat into profits."

Cho added that "new product launches aren't making quite the same splash that they used to — an unnerving trend as Samsung prepares to roll out the latest refresh of its Galaxy Note 4 smartphone-tablet hybrid next week at a trade show in Berlin."

However, at one point in his commentary, I think that Mr. Cho read the tea leaves incorrectly. Mr. Cho added that "a strategic focus back to components, from smartphones, could give the company a "soft landing" as profits in its smartphone division falls. He points to Samsung's truce with Apple earlier this month on patent suits as evidence that Samsung is clearing the way to sell more chips and display panels to its Cupertino, Calif.-based rival."

The partial truce between Apple and Samsung isn't going to change anything unless Samsung drops their never ending appeals and pays Apple what's due for their patent infringements. Samsung is likely losing more profits over their resistance to a deal with Apple than it's worth.

Perhaps with Samsung's leadership transitioning to senior Lee's only son, the company will want to work with Apple going forward instead of continuing their war. But that's a story for another day.

At the end of the day, the WSJ report noted that "some analysts argue that the company's recent smartphone woes are putting Samsung in "crisis mode," following a long run of success and complacency." Yet that argument is a little late considering that Samsung's "crisis" actually began over a year ago. At that point in time few publications were interested in reporting on that development because they were all to busy stumbling over each other praising Samsung's killer "Volume Strategy." Hmm, how's that going for them now?

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